Kiev addresses Moscow with fresh demand for lower price of gas

MOSCOW, October 12 (Itar-Tass) - Relations between Russia and Ukraine, no simple at all of late, keep getting worse. This time Russia’s price of gas is the stumbling block again. Kiev argues it has to pay too much and warns that it may curtail the import of this fuel altogether. Moscow has warned of likely sanctions, for it is certain that Ukraine will be unable to do without Russian gas anyway.

Ukrainian Prime Minister Nikolai Azarov said last Thursday that Ukraine might curtail the import of gas from Russia, if the effective contract between Naftogaz and Gazprom were not revised. Azarov speculated that his country might stop buying any amounts of Russian gas, which it found too expensive, within ten years at the most. “Ten years to come is even too long a period,” he said. “I believe that we shall be able to achieve this goal much faster, if the current rate of increasing energy effectiveness, reduction of gas consumption and transition to alternative fuels persists.”

Azarov declared that Kiev would be prepared to prove the absurdity of the current gas contract, if Gazprom took Ukraine to court for defaulting on its terms. He recalled that under the conditions of the current contract Ukraine was unable to sever it unilaterally.

This statement followed two days after Russian President Vladimir Putin said that Gazprom had offered discounts off the price of gas for Ukraine. Putin said that Gazprom had sold enough gas to Kiev for filling the underground gas storages at 260 dollars per one thousand cubic meters. In contrast to this the price of Russian gas in the last quarter of this year, according to the Ukrainian Energy Ministry, is 410 dollars.

The current gas contract between Gazprom and Naftogaz Ukrainy was signed in 2009 for a period of ten years. Kiev has slammed it as a slave contract due to the high prices.

Also, the contract stipulates that the smallest amount of gas to be provided should constitute at least 80 percent of the annual contracted amount. If the latter term is abused, Ukraine will be obliged to pay a fine for under-consumption. According to the latest estimates, the fine has already reached seven billion dollars, as Ukraine has reduced the import of gas dramatically over the past two years.

Ukraine’s former prime minister, Yulia Timoshenko, who signed the contract with Vladimir Putin, is now serving a prison term for the abuse of power.

Having failed to come to terms with Gazprom over a price reduction Ukraine began to import some gas from Europe, in particular, from Poland, Hungary and Slovakia. To ease dependence on Ukraine as a transit country Russia in turn laid the Nord Stream pipeline under the Baltic Sea to Germany and initiated the South Stream pipeline project that would link it with Bulgaria via the Black Sea.

However, contrary to its strong statements Ukraine has had to reduce reverse gas supplies from Europe, because the fuel it can purchase on Europe’s spot market (under short-term contracts at variable prices) costs more than Russian.

“Any attempts to revise the existing gas contracts between Russia and Ukraine will have quite obvious legal effects,” she said. “Before making such statements our Ukrainian partners should recall that in case of a unilateral revision of contract terms sanctions may follow.”

“At the moment there is a contract that implies serious penalties and fines in case of default. Also, I can see no alternative that might let Ukraine stop using our gas,” the president of the Russian Gas Union, Sergei Chizhov, told the government-published Rossiiskaya Gazeta in an interview.

He believes that the amount of gas that Ukraine has pumped into its storages is unlikely to last for two or three years. Gas coming from Azerbaijan is not enough, too, and shale gas production in Ukraine’s own territory is “embryonic.”

“Poland, Hungary and Slovakia, where Ukraine hopes to buy gas have no deposits of their own. This re-export arrangement is unlikely to meet Ukraine’s needs, if the winter is too cold. I believe that the Ukrainian Prime Minister’s statement is unlikely to bring about a revision of the price. The latter would be possible only in combination with other measures geared to integration,” Chizhov said.

The general director of the National Energy Institute, Sergei Pravosudov, is quoted by the news agency Prime as saying that Ukraine’s statements to the effect it would stop using Russian gas have been made for several years, since Yulia Timoshenko’s premiership.

“There were plans for using straw and coal for fuel, for building a terminal in Iran and for relying entirely on LNG. The sole change that has occurred since is they have started taking gas from the very same Gazprom pipe, saying it is import from Europe,” the analyst said.

The co-director of the analysis department at Investcafe, Grigory Birg, sees Azarov’s statement as political first and foremost. Ukraine has already reduced gas consumption to a minimum, using alternative fuel sources and semi-legal reverse traffic schemes.

“Ukraine’s options are few and the situation is grave. The potential of shale gas production as an alternative to Russian fuel is very insignificant. In any case, it is a very remote possibility,” he said.